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Published 19 September 2019
The DHSC has responded to continuing concerns about how the operation of the tapered annual allowance is affecting the delivery of NHS services, by launching a new consultation (dated 11th September 2019).
The consultation proposes that GPs, senior doctors and nurses be allowed the flexibility to set their own level of pension contributions at the start of each tax year and pay lower contributions to reduce the likelihood of the annual allowance/lifetime allowance impacting on them (with contributions being a percentage of the normal scheme contribution in 10 per cent increments of the full accrual level). Other proposals include an option to change their pension contributions towards the end of the tax year when the individual has a clearer idea of their tax situation; and individuals who receive a large pensionable pay rise being able to incrementally phase, over several years, the extent to which their new pay is treated as pensionable. DHSC is also developing a tool to help clinicians tailor the new flexibilities to support their own individual circumstances.
Subject to the consultation outcome, the government will work to implement the changes in time for the beginning of the 2020/2021 tax year.
According to DHSC, there isn’t a clear case that annual allowance tax charges are creating retention and productivity issues in the non-clinical NHS workforce. However, the Department has invited submissions on whether non-clinical staff exceeding the annual allowance is leading to a reduction in NHS capacity and impacts patient care.
Whilst the approach of continuously opting in and out of the Scheme has allowed some individuals to manage their pension growth, the Department wants to offer a more structured option within the Scheme. The Department therefore proposes to amend NHS Pension Scheme rules to provide a new ‘flexible accrual’ facility. The proposals will allow eligible members to:
In addition, under the proposals:
The Department proposes that eligibility for this flexible accrual option be contingent on meeting two tests. The individual must:
The NHS Pension Scheme currently operates a “Scheme Pays” facility, through which individuals can meet their annual allowance tax charges by choosing to have it deducted from their pension pot at retirement. Under Scheme Pays the pension scheme pays the tax charge on behalf of the member directly to HMRC. This creates a debt that is repaid at retirement where the charge value plus interest is deducted from the member's pension before it is put into payment.
However, the current way that the NHS Pension Scheme operates Scheme Pays may not provide a clear insight on how it affects member pensions. The consultation proposes an alternative method that seeks to provide greater transparency for members. This would involve annual member benefit statements showing the Scheme Pays deduction as a pension debit so that they can see the adjustment to their pension at retirement as it increases with interest each year and compare this with how the accrued pension also increases over time though annual pot revaluation or salary increase.
Staff who are high-earners early in their career may incur annual allowance tax charges frequently throughout their career. Whether staff pay their annual allowance charges by using Scheme Pays or in cash upfront will be an individual decision and depend on their circumstances. Central to this decision is a clear understanding of how at retirement the size of a Scheme Pays deduction from the pension compares with the final value of the pension growth that led to the tax charge, i.e. does the additional pension outweigh the debit?
Where members choose to opt-out of the scheme because of annual allowance tax charges, some employers are considering or have actually started paying the members the value of the unused employer contributions. This already happens for GP partners who retain within the practice the employer contribution that is included in the payment received for performing their primary care contract. Although the Department is committed to the NHS Pension Scheme remaining a cornerstone of the reward package for all staff , the Consultation recognises that “for scheme members who do or are likely pay annual allowance tax charges, alternative reward options could be appropriate”.
Paying unused employer contributions as additional salary
A number of points arise from the Consultation:
Following the conclusion of the Consultation on 1 November 2019, the Department will (taking into consideration recommendations made by the NHS Pension Scheme Advisory Board in the near future) publish a consultation response which will set out how the government will proceed. Should Regulations be required, there will be a further consultation period for stakeholders and the public to consider and comment on the detailed changes being proposed. These intentions could of course become disrupted by political developments and the fallout from Brexit.
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